MIS 9003 – Prof. Min-Seok Pang

Week 02 – Firm Boundary

Week 2 -Tae et al-Sidd Bhattacharya

Two perspectives have been persistent in previous research. One, says that in the face of disruption the reactive ability of firms determine how much superior profits it can garner until a new equilibrium is reached. Two, that firms are more interconnected than ever before often sharing and utilizing each other’s resources and inputs. This paper asks the research question of how operation disruption of firms which is dependent on shared resources affects not just the disrupted firm but also other firms that are sharing the resource. Further, the paper wants to investigate whether this effect is moderated by the routine complexity of the firm who is disrupted and also their own routine complexity. The context of the research is the US airline industry and especially episodes of major disruption (37 between 2000-2017 out of which 4 major ones are taken into account here). The shared resource is the airports while the performance data is gathered from BTS On-time Performance(OTP).The paper uses simple OLS specification while trying to measure the departure delay, arrival delay and excess travel times as measures of on-time performance. With a data set of 75,051 flights during the 4 disrupted periods, the paper finds that disruptions to one airline may have negative effects on the on-time performance of competitors who share the same resource. Further, results indicate that when FSCs ie those with more complicated routines are disrupted there are significant and negative spillovers onto competing LCCs and FSCs. These results reverse when LCCs are disrupted with positive performance improvements. The analysis section does extensive robustness checks to ensure robust identification. The research has important implications for both firms, IT designers and regulators. The research also contributes to the literature by being the first to show the effect of focal firm’s disruption on competitors with whom it shares resources.

Week 2 Reading Summary (HK)

Ray, G., Wu, D., & Konana, P. (2009). Competitive environment and the relationship between IT and vertical integration. Information Systems Research20(4), 585-603.

Information technology (IT) can reduce coordination costs for companies, both internally and externally, minimizing barriers preventing the use of markets. Based on this premise, it is proposed that increasing the use of IT will in turn decrease the employment of vertical integration (VI). Past research has found that less vertically integrated firms have a higher need for external coordination and thus a higher demand for IT capital (Dewan et al., 1998; Hitt, 1999). Despite this premise and its empirical support, the average level of VI has increased over the past 25 years. This prompted Ray, Wu, and Konana (2009) to examine firms included in InformationWeek 500 from 1995 to 1997 using COMPUSTAT data to better understand this incongruence. Ray et al. (2009) considered demand uncertainty and industry concentration as boundary conditions which impact VI and IT spend. Demand uncertainty captures the degree of unpredictability in consumers’ tastes and preferences as well as in production and service technologies. Industry concentration is high when a leader or leaders control an industry with high barriers to entry; diluted industries are those with many small firms.

Results found that when demand uncertainty is high or industry concentration is low, results were consistent with past literature; IT is associated with a decrease in VI. In these conditions, an increase in the level of VI is associated with an increase in product and coordination costs and thus, less VI is ideal. On the other hand, when demand uncertainty is low or industries are highly concentrated, IT is associated with an increase in VI; this is contrary to past literature. In these environments, VI is associated with a decrease in production and coordination costs and thus, is ideal. Effectively, these findings indicate that the industry environment impacts the value of VI and IT.

Week 2 Reading Summary – Tae et al. (2018) – Xi Wu

Tae et al. (2018) When Your Problem Becomes My Problem: The Impact of Airline IT Disruptions on On-Time Performance of Competing Airlines

Disruption within the competitive environment and its subsequent effect on firm performance has been a crucial topic, yet there is few research about the effect on the competitive environment on rival firms when a resource-sharing firm experience an operational disruption. As is well established, the disruption of organizational routines often leads to performance degradation.  This paper argues that, in the presence of a shared resource, the disruption of the focal firm’s routines will also lead to the disruption of the competitors, and subsequently diminish the competitor’s performance. In addition, following the idea of routines as coordination mechanism, the study also examines how the complexity of routines, of both the disrupted firm and the competitor, affects the ability to react.

The empirical context is U.S. airline industry, where individual airports are the shared resource. Airlines have been subject to multiple recent large-scale disruptions. This paper examines the change in on-time performance (OTP) of airlines with and without IT disruptions, for flights departing from and arriving at hub airports of the airline experiencing IT disruptions, relative to all other flights. Complexity of routines could be indicated by full-service carriers (FSC) and low-cost carriers(LLC).

Using a sample data of 75,051 flights during four IT outrage incidents, this paper conducts fixed effect empirical models, and find that disruptions to one airline may have negative effects on the on-time performance of competitors who share the same resource. The direction and the magnitude of the effect is conditional on the routine complexity of the firms. This study complements the literature on firm adaptability under environmental change by considering the role of firm interdependence, and shed light on the impact of routine complexity on firm adaptability and performance.

Week 2- Reading Summary- Leting Zhang

Baker, G. P., & Hubbard, T. N. (2004). Contractibility and asset ownership: On-board computers and governance in US trucking. The Quarterly Journal of Economics119(4), 1443-1479.

How informational capabilities affect the boundaries of the firm, specifically, the ownership of assets? In the context of U.S. trucking, the paper investigates the impact of OBD(On-board computers) adoption on two kinds of ownership by changing the contracting environment.

The analytic framework  is based on property rights theories, it expalains how contractual incompleteness can affect the comparative advantage of using an owner-operator for a haul relative to a company driver.   There are two main costs two ownerships face,  company driver has higher agency costs compared to owner driver who faces a higher bargain costs.  Agency costs are from the seperation between residual right and residual claimant.  Bargain costs are from the inefficiencies associated with bargaining over the truck’s use. However the OBD could reduce the agency costs.  Based on the framework, the paper proposes that (1). longer hauls are more likely to be completed by owner-operators; (2) unidirectional hauls are more likely to be carried by owner-operator; (3) driver-ownership should decline with OBC adoption; (4) the relationships between OBC adoption and ownership should be stronger for long hauls than for short hauls.

In the analysis part, the paper uses Truck Inventory and Use Surveys from 1987 and 1992. Firstly it examines cross-sectional relationships and test the first two hypotheses, then it constructs cohorts and take several approaches including first difference estimation, instrumental variables to solve the endogeneity and test the main hypotheses.

The results suggests that improved contracting, using on-board computers in the context, leads to more integrated asset ownership. In another word, the changes in monitoring technology could change the industry structure in this sector. The implications could also be applied to other sector, like medicine.

Week 2 – Ray et al. (2009) – Joe

Ray, G., Wu, D., & Konana, P. (2009). Competitive environment and the relationship between IT and vertical integration. Information Systems Research20(4), 585-603.

As information technology(IT) can reduce coordination costs, the electronic markets hypothesis indicates that increased use of IT in the economy may suggest decreased levels of vertical integration (VI). The empirical work of related topics, however, contradicts previous research in the way that vertical integration (VI) has increased rather than decreased. The authors claim that the demand uncertainty and industry concentration, two measures of the competitive environment, can moderate the relationship between IT and VI.

The authors adopt firm-level IT spending data from 1995 to 1997 drawn from InformationWeek 500 that had been used in prior research. To overcome the simultaneity bias of VI and IT, the authors propose a 2-equation model to uncover the causality. The results suggest that in uncertain demand and in the unstable competitive environment, IT is associated with decreased VI. While in more predictable and concentrated environment, IT is associated with increased VI. Also, they find that firms made rational strategies about VI and IT in different competitive environments to decrease the coordination and production cost. Compared with the previous literature, this paper provides a more refined understanding of the relationship between IT and VI.

This article empirically addresses the key endogeneity issue, a firm will choose its IT investment given its VI level, and vice-a-versa, when people tried to discuss the benefit of IT on the use of markets for companies. It contributes to the literature by showing the difference in the use of IT across different competitive environments. The implication of this research is that the level of VI should be chosen strategically based on the nature of the competitive environment. The research question of this paper is clear and straightforward. This work could be a remarkable econ-IS paper in 2009.

Week 2-Reading Summary-Jack Tong

Paper: Rawley, Evan, and Timothy S. Simcoe. “Information technology, productivity, and asset ownership: Evidence from taxicab fleets.” Organization Science 24, no. 3 (2013): 831-845.

The authors examine how technology adoption impacts firm’s vertical integration and worker’s skills. The paper applies a formal productivity-based theory of asset ownership and tests it by measuring the impact of information technology adoption on asset ownership in the taxicab industry. The authors posit that improvements in technology lead to increased integration and a greater reliance on unskilled labor.

There are three types of organizations in the proposed model: 1. independent owner-operators; 2. fleet-affiliated drivers who own a car but contract for dispatching; 3. shift drivers who rent both a car and dispatching service from a fleet. The empirical results show that adopting a computerized dispatching system causes taxicab firms to increase the percentage of vehicles they own from affiliated drivers.

This paper contributes to two streams of literatures: firm-boundary and skill-biased technical change. The paper provides a theory-based model and empirical results that technology adoption causes firms to increasingly vertically integrate, even without changes in asset specificity. Moreover, the paper also provide additional support on the limitation to the standard skill-biased technical change hypothesis that information technology typically increases the demand for skilled labor.